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Personal Finance for Expats

5 High-Risk Investments & Reasons to Be Cautious of Them

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When it comes to investing your money, there are both low-risk and high-risk options. This article focuses on certain high-risk investments and reasons why you might want to be wary of them. But first, it is necessary to know what high-risk investments are. A high-risk investment is an investment that has the potential to help you get a higher than average relative return on the money that you have invested. But these products or types of investments that we will discuss may also come with a high dose of risk. Notice that the key word here is potential. This means that if you, as an expat investor, choose to use these methods to invest your money, you may also be taking a high risk as well. Why are they considered to be high-risk? A high-risk investment can be analyzed in two ways: the first of these ways is that there is a larger percentage or chance of a loss of capital. The second way is that there is a very high chance of loss when you are immersed in a high-risk investment strategy. Bu what are some of these high-risk investments? Read below to find out!

  1. Leveraged Investments 

This type of investment involves using borrowed funds in an attempt to increase the potential return on any investment. There are various leveraged products that exist on the market, such as exchange traded funds with double or triple the leverage. The risk involved with this type of investment is that let’s say that you decide to invest up to three times the value of the index. If the market goes down, then the risk would be that you will lose all of the money that you invested using leverage. Leveraged investments are done in such a way that it seeks higher investment profits by using borrowed money. The most common example of leverage is the one called financial leverage, which is using borrowed money to purchase asset(s) because you expect that the asset has potential to generate future income or rise in value. Hence, the greater the amount of your debt is, the greater the value of the investment will be. As the leverage rises, so does the risk of failing, because it becomes more difficult to pay off the debt that you have accumulated. There are two other types of leverage and they are construction leverage and instrument leverage. Construction leverage is when you combine securities in a portfolio in a certain way. For instance, the investor can choose to “hedge” certain assets. An example of instrument leverage is when you invest in gold that has the potential to magnify an increase in the price of futures three-fold.    

2. Trading Using Options

Another high-risk investment is called Options or Trading Using Options. This investment strategy allows an investor to make money off of stocks or other securities even if there is no rise in the markets. In this type of investment, there is an options contract that is involved. When an investor buys an options contract, they are essentially buying the right to purchase or sell an asset at a set price before a certain date. For instance, if an investor agrees to buy 200 shares of Microsoft stock priced at $250 a share and that stock ends up trading for less than that, the investor makes money. Why is this a high-risk investment though? There is an option called a naked option where an investor can choose to bet against a certain stock. If the investor believes that this stock will not go above the said $250 per share, he or she enters into a contract that is set to expire in June of 2020, for instance. When June 2020 comes around and Microsoft’s stock ends up trading at $350 per share, the investor then loses the difference or $100 per share, resulting in a significant loss. 

3. High-Yield Bonds

This type of investment strategy is common for older investors and retirees who are looking to invest in the fixed income market through the use of corporate, municipal bonds, and US Treasuries. It is possible to get a higher rate of return from bonds if you are willing to take the risk to purchase riskier debt. I wouldn’t encourage anybody to get into a ton of debt but what was described earlier is known as the risk premium. One of the most common bonds that is a high-risk investment is what is known as a “junk” bond. Junk bonds are junk in the sense that they have a higher risk of default compared to bonds that are issued by large companies or governments. Junk bonds are issued by companies that are not doing well financially. These kinds of companies have a higher risk of defaulting, not being able to pay their interest payments or repaying the principal that they owe to investors.      

4. Currencies & Cryptocurrencies

When it comes to currencies, these can change quickly. The rate of success using this investing strategy depends on how you can predict these changes and act on these movements, which will then determine how successful you become on the foreign exchange market or Forex, for short. Currency swings, especially outside the US, can allow an investor to get high potential returns if they forecast the changes correctly. However, a wrong bet on a currency can result in the loss of all the money you have invested. In addition to this, currencies are often traded using leverage, so in a situation where you made a mistake, betting on a currency can make your losses even bigger. A cryptocurrency is a digital or virtual currency that becomes successfully secured by cryptography, and while it definitely deserves its own article, one can easily look up the history of Bitcoin, Ethereum, and other cryptocurrencies to see that huge fluctuations in price are not uncommon. These are certainly not for the faint of heart.

5. Foreign Exchange Traded Funds (ETF’s)

At its most simple level, exchange traded funds or ETFs for short are investment securities that are similar to mutual funds but they trade like stocks. They can be traded by an exchange basis and ETFs are commonly referred to as a “basket of assets”, where the investor does not need to purchase these assets by themselves. I bet you are wondering how an ETF works. Typically, the person or company that is providing these funds owns the initial assets and they design or formulate a fund to keep track of how these investments are doing. They then sell the shares in those funds to investors. While ETFs based in the US have a long history and have generally been a solid investment, it may not necessarily be the case for foreign ETFs, given that we tend to see more volatility in less-developed foreign markets.

What Is a Real Estate Investment Trust?

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In a previous article, I discussed five ways that a person and especially an expat can invest their money other than through stocks and bonds. This next article discusses what a real estate investment trust (REIT) is and why someone should take advantage of this kind of investment opportunity. So what is a real estate investment trust or REIT?

A real estate investment trust is when a company owns and typically operates real estate which generates income. Note that this is different from when an individual owns real estate for the purposes of generating income. REITs are part of a fixed-income portfolio or part of the company’s portfolio. There is another major difference in a REIT compared to other real estate companies and that is that a REIT does not engage in the development of real estate properties to resell them. Instead, when there is a REIT that is established, properties are bought and developed so that the company can include them as part of its portfolio. Your next question may be, why should I invest in a REIT? What are the benefits for me to do this? REITs provide a way for you as an investor to earn a share of the income that is produced through commercial real estate without you having to go and buy commercial real estate. REITs generate dividend income.

There are many examples of what is a REIT. This includes property such as an apartment complex, health care center, office buildings, retail centers and warehouses.

The business model of most REITs is straightforward. The company that has established the REIT is able to lease space and collect rent on the property and then the income generated is distributed as dividends to shareholders. But establishing an REIT isn’t as easy as some may think because it doesn’t happen overnight. Companies that decide to establish REITs must meet certain specific requirements outlined in the Internal Revenue Code. These requirements include:

  • Having to invest at least 75% of its total assets in cash, real estate, or U.S. Treasuries.
  • The company must receive at least 75% of its gross income from real property rents, interest on the mortgages financing the real property, or from sales of real estate.
  • The REIT must return a minimum of 90% of its taxable income in the form of shareholder dividends every year.
  • It must have at least 100 shareholders after its first year in operations.
  • The REIT must have no more than 50% of its shares held by five or fewer people during the last half of the tax year.

There are different types of REITs and for the purposes of this article, I will list and describe five of them.

Retail REIT

The first kind is a retail REIT. A retail REIT is found in a shopping mall. If you are an expat or even a U.S. citizen, make sure that you remember that at the most basic level, retail REITs make money from the rent that they charge tenants. A fact of life is that every property and business owner has to have a consistent cash flow in order to survive and prosper. If a retailer is having a cash flow problem due to poor sales, it is likely that they could delay or even default on those monthly payments and when that happens, the REIT will dissolve. Also, finding new tenants is never easy. Once you have assessed your REIT, it is then important to focus on the type of REIT that you will be investing in. Also, in economic downturns, retail REITs with stronger financial positions will have opportunities to purchase real estate at lower prices. However, there is one big long-term concern that those of us that want to invest in retail REITs will face. Shopping is moving online and owners that have space have basically been forced to innovate and change their strategy. They have attempted to fill their space with offices and other non-retail oriented tenants but even so, this sector is facing increasing pressure.

Residential REIT

A residential REIT is when multi-family apartment buildings are owned and operated. Another type of residential REIT that is common is manufactured housing. If you wish to invest in this type of REIT, there are several factors to consider. For instance, the best apartment markets in terms of yield tend to be cities that have lower home prices relative to the rest of the country that you are living in. This applies as a consideration whether you are living in the U.S., Mexico, or China. When you want to invest in a residential REIT, there are two main factors to be aware of and take into consideration. These factors are population and job growth. When there is a net inflow of people to a certain city it is because there are plenty of jobs and the economy is growing. In a growing situation such as this, you as the investor stand to profit enormously. Residential REITs should continue to do well in cities where the apartment supply remains low and demand for them rises.

Healthcare REIT

A healthcare REIT is when the investor invests in the real estate of places such as hospitals, medical centers, nursing facilities, and retirement homes. The success of this type of REIT depends upon how the healthcare system of that country is functioning.

Office REIT

As the name of this type of REIT implies, when you invest in this type of REIT you are investing in office buildings. You will receive rental income from tenants that have signed leases (usually long-term). There are four questions that any investor should consider when they want to invest in this type of real estate:

  1. What is the state of the economy in my chosen city or country and how high is the unemployment rate?
  2. What are the vacancy rates in my city?
  3. How is the area in which I’ve invested doing economically?
  4. How much capital is available for acquisitions?

Mortgage REIT

A mortgage REIT is a REIT that some investors choose to invest in more than the others I mentioned. This type of REIT invests in mortgages as opposed to equity. Mortgage REITs are not risk-free, though. If interest rates go up, there will be a decrease in mortgage REIT book values and stock prices will go down. In addition to this, future financing will be more expensive and this expense will result in the reduction of a portfolio of loans.

5 Ways to Invest Money Other Than Buying Stocks and Bonds

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Whenever you talk to someone about investing, they invariably assume you are referring to equities, such as stocks and bonds. However, when it comes to investing, there are more ways to invest your money other than just buying stocks or bonds, particularly if you are an expat. Before I go any further, let me just say that I am not a financial advisor, that this should not construed as financial advice, and that this article is just meant to provide a general introduction to how expats can invest their money. The more options that you have to invest your money, the better, so it will behoove you to look into all possible opportunities wherever you live, no matter what your county of citizenship might be.

For starters, the most obvious form of investment that most people overlook is investing in your own business. If you have a side hustle or even your very own business that you derive your income and livelihood from, you have more control over operations, finances, and of course, the vision and mission of the business. Therefore, you give yourself a better chance to be the architect of your own future, than if you remained a company employee. Further, you might be able to take advantage of some niche in a foreign country and tap into an unmet need, generating great profits.

If you are not interested in a business that you own or operate, either because of large capital requirements, time constraints, or you do not wish to take on that much risk, you might want to own a portfolio of real estate assets. It is pretty much a given that there will always be people in this world who will be renters, and so there is a demand for rental property, which will help you generate rental income. 

SEE ALSO: Some Reasons to Invest Offshore 

If you get into a growing country/market early and the value of the property increases over time, it will be worthwhile to invest in it. Further, while your rental property is increasing in value, you are also hopefully deriving some good cash flow from monthly operations. This double benefit of capital appreciation and cash flow is what makes real estate a good way for expats to build their wealth. Another good reason to invest in real estate is because of your ability to diversify your assets, which is what is always recommended by financial planners. Adding real estate to your portfolio of assets has the ability to lower the chance that your portfolio becomes susceptible to the whims of the market.

Here are three other ways that anyone, especially expats, can invest their money in ways other than stocks and bonds:

  • P2P (Peer to Peer Lending) 
  • Equity Crowdfunding
  • REIT’s or real estate investment trusts

There are online P2P services that offer loans to businesses, for personal use or anything else. You might be wondering how P2P loans are different from getting a loan from a bank. There is no bank when you are involved with this kind of thing. Your money is pooled with the money from other investors and with these investors you make a loan to the client(s), asking for the funds. Then, you will get a fixed amount of repayments each month and part of this repayment includes the interest that you would be owed. However, there is a risk involved with P2P lending. The risk is that you would be lending money to people that may not have been able to get a loan from a bank, or are unable to go through the traditional ways of getting a loan. This could increase the possibility that they could end up defaulting on the loan.

Equity Crowdfunding is another way that you can invest your money as an expat. If you do not want to own your own business for whatever reason, you can choose to own part of someone else’s company. Companies that are in the process of starting up have the option of offering shares of their companies on equity crowdfunding websites. If you choose to invest in a company, you own part of that company, and therefore, if the company succeeds financially, you will reap some benefits. However, if the company fails, you may lose all or part of your money.

REITs, or real estate investment trusts, is when a company owns and typically operates real estate which generates income.  Note that this is different from when an individual owns real estate for the purposes of generating income. REITs are part of a fixed-income portfolio or a part of the company’s portfolio. There is another major difference in a REIT compared to other real estate companies and that is that a REIT does not engage in the development in real estate properties to resell them. Instead, when there is an REIT that is established, properties are bought and developed so that the company can include them as part of its portfolio. REITs provide a way for you as an investor to earn a share of the income that is produced through commercial real estate without you having to go and buy commercial real estate.

No matter which country you are currently living in, there may be various options available to you. While equities are an attractive investment given the ease of investing and lower capital requirements, you might want to look into other options, such as those described above. After all, at some point in the past, you decided to leave the shores of your home country and become an expat. Therefore, you owe it to yourself to look into what financial adventures might be awaiting you in foreign lands.

The Need for an Expat Personal Finance Blog

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Despite what many people may think of us and the seemingly lavish lifestyles we are supposed to be living, we expats are a neglected lot, especially when it comes to obtaining good, relevant, and free (or cheap) advice on personal finance.

Performing a search for “personal finance for expats” online provides precious little that we can use. There is certainly not, at least that I have found, a knowledge base in a blog format where expatriates can go to read up on personal finance as it relates specifically to them.

Finally, advice such as “invest in an index fund” seems insulting to our intelligence, given that we probably could have figured that out by ourselves, and more importantly, because it ignores the array of investment options around the world. Indeed, there are numerous investments out there that many people have never heard of of, and we would be doing ourselves a disservice by not exploring and investigating what those options are. Because just as life as an expat requires flexibility, an open mind, courage, and an inquisitive mindset, investing as an expat requires those same qualities if one intends to be successful at developing a solid financial future.

Perhaps you work at an overseas office of your company, and are looking for ways to save for your retirement, as you are not very happy with the state pension plan of the country you live in.

Or perhaps you have started your own business and are now living overseas. You are excited but also apprehensive about this change in your life, and are worried about how you can invest money, now that you are living overseas.

Or maybe you are a perpetual traveler, sailing the seas of the world, climbing the tallest peaks known to humankind, or hopping from one island to another, taking in all that life has to offer.

Whatever your situation is as an expat, if you are interested in saving and investing, then this blog will be useful and applicable to you and your situation.

Many personal finance bloggers and experts seem to be writing from a position where they cannot truly understand the situation facing us expatriates. While I am not a financial planner and don’t claim to know everything, I am writing to you as a humble expat who has lived and worked on three different continents, and someone who has first-hand experience of the challenges faced by expats. Additionally, being a tax advisor specifically serving the expat market, I believe I am positioned to offer advice to other expatriates, especially as it relates to foreign taxation and its various implications.

Throughout my life and travels, I have found that many expatriates have little or no idea how or where they can save and invest money overseas. This blog is intended for them.

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